Internet in Middle East Still Short of Its Potential

BEIRUT—The Arab Spring threw the Internet in the Middle East and North Africa into the limelight. The net hadn’t previously featured much in the narrative of the region. Now it was being credited, rather generously, with helping bring down entire regimes.

A recent conference in Beirut painted a different picture. Last week’s third ArabNet conference for digital entrepreneurs in the MENA region was, by the standard of these things, a modest affair. But nonetheless it showed how the regional digital economy has grown, and how it is poised to take off. As one commentator said: “Jordan for the talent, Lebanon for the creativity, Egypt for the eyeballs and Saudi Arabia for the purchasing power.”

Currently, for a region that is awash with cash, the Internet economy is tiny. According to figures published by ArabNet, Turkey has half the number of Internet users as the whole Middle East and North Africa region. Yet Turkey’s e-commerce market, at around $12 billion, is roughly three times that of the MENA region. So what is holding the region back?

Rashid AlBallaa, CEO of N2V.com, a Saudi-based firm of venture capitalists, points to a lack of maturity. Paradoxically, for a region that is flush with money, one of the problems is a lack of cash. Early stage investments of about $100,000, he said, are hard to find. “It is very hard to get this $100,000 and find investors who will roll up their sleeves and help you.” And unlike in Silicon Valley, where an abundance of highly skilled engineers are easy to find (if hard to recruit), the same depth of skills doesn’t yet exist in the MENA region.

As well, shipping goods can be prohibitively expensive because of import duties. “In the United States you can ship anywhere,” said Omar Christidis, the founder of the ArabNet conference. “Here you could be charged customs that are the equivalent of the price of the product.”

And even if you can ship the goods, getting paid and then delivering them are challenges that more complex here than elsewhere. Credit-card penetration is low. According to Ahmed Alkhatib—CEO of MarkaVIP, a site that sells high-fashion items at greatly reduced prices, and which landed the largest VC deal in the region last year—85% of sales are cash on delivery.

And that delivery isn’t a simple thing. Mr. Alkhatib says that in Saudi Arabia, for example, it often takes three or four calls from a courier to the purchaser to find the house. Street names and house numbers aren’t standardized.

Talking about the region as a homogenous whole masks significant differences.

“None of the single countries make up a large enough market to be interesting for any start-up,” said Mr. Christidis. Only Egypt, with a population of just over 80 million (roughly the size of Turkey or Germany), is large enough, but its goss domestic product per capita is only $6,500 (Turkey’s is about $14,600, Germany’s is about $38,000). By comparison, Qatar has the money (GDP per capita is $102,700) but not the people: a population of only 1.9 million, slightly larger than Estonia.

Finally the state of the infrastructure varies wildly across the region. While 55.5% of Jordanian Internet users have speeds of 512 kilobytes per second or less, the average speed in Saudi Arabia is 1.85 megabytes per second. According to a 2010 Saudi government report, Egypt has only 5% home broadband penetration. As with many emerging economies, mobile broadband is dominant. Saudi Arabia has a mobile penetration of nearly 200% (two phones per person), and 26% of all phone are smartphones (it is 25% in the U.K.).

However, unlike polyglot Europe, the MENA region does share a common language among most of its 330 million inhabitants. Over the past 10 years Arabic online usage has grown by 2,500% and by the end of 2015, Arabic is expected to be the fourth-largest language group online (it is currently 7th), with some 150 million users (currently around 72 million), according to N2V. This bodes well for pan-Arabic sites.

According to Mr. AlBallaa, there is a wind of change blowing through the region. From a very small starting point, growth is happening. More VC deals were done in the first quarter of 2011 (23) than in the whole of 2010.

It is a view shared by Mr. Alkhatib, who cites the growth in mobile as a key driver. Although MarkaVIP only recently launched a mobile app, nevertheless, some 25% of sales come from mobile devices, he said.

It is certainly true that the buzz at ArabNet was equal to, if not, greater than, that at any comparable European start-up conference. The kind of companies on display—typically local versions of successful business models—may not be strikingly innovative.

Nonetheless, they are part of the maturation of an Internet economy. After all, it is not that long ago that Germany had a reputation for simply cloning existing models.

Those clones are beginning to grow and will in turn help kickstart the economy. MarkaVIP, for example, now operates in eight countries in the region, and is on track for $100 million in sales this year. While tiny in comparison to its decade-old French progenitor (which, according to its own figures, did more than €1 billion turnover in 2011), the company has only been going since November 2010.

While Mr. AlBallaa admits there are a great many things that need to be done, “these are not obstacles,” he says, “they are challenges. After all, not that much more than 50 years ago Saudi Arabia was just a patch of sand in the desert.”

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